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It used to be that markets waited anxiously to see what the Federal Reserve
would decide about short-term interest rates. These days that's a given:
rates are stuck between 0% and 0.25% for the foreseeable future. Instead,
the only real news one can hope for out of a Federal Open Market Committee
(FOMC) meeting has to do with the $1 trillion-plus stash of mortgages and
other debt securities that the Fed has built up during the past two years of
financial turmoil. Is it going to step up its purchases (meaning it's still
worried about economic collapse) or start winding them down (meaning it's
starting to worry about inflation)?

When the FOMC emerged from a two-day meeting on June 24, though, it
didn't even offer a definite signal on that. "There's clearly a debate going
on within the Fed as to what they should do next, and there's no need to
make a decision yet," says Marvin Goodfriend, a former chief economist at
the Federal Reserve Bank of Richmond who now teaches at Carnegie Mellon's
Tepper School of Business. "The Fed is essentially buying time before it
commits to whether the disinflation risk is greater or the inflation risk is
greater." (See pictures of the dangers of printing money.)

Actually, there was a slight shift since the last Fed statement. At the end
of April, the FOMC worried that "inflation could persist for a time below
rates that best foster economic growth and price stability in the longer
term." This time the wording was shortened to a simple prediction that
"inflation will remain subdued for some time."

Teasing the meaning out of such changes is what Fed watchers do  they're sort
of like Kremlinologists before the fall of the Soviet Union. UniCredit
economist Harm Bandholz interpreted the new wording to mean that the FOMC
had decided that "the deflation threat is gone."

In fact, gone may be too strong a word. The Fed, and the rest of us, are
in uncharted territory. We've just been through a financial shock that was
in some ways worse than the one that set off the Great Depression. The
policy response from the Fed and Congress was pretty much the diametric
opposite of that of the early 1930s, so the hope is that things will turn
out better this time. But we just don't know.

The early years of the Depression, in fact, were marked by repeated periods
during which the economy seemed to stabilize, only to careen further
downward  usually as the result of some new spate of bank failures. Since
March, the economy has clearly been stabilizing, but there's no guarantee
that trend will continue. The data lately have been mixed  today, durable-goods orders were up by more than expected, while new home sales were down
by more than expected. So the Fed remains in a holding pattern, one that
Goodfriend expects will continue for months.